How fund charges impact performance
Fund charges matter because, whilst performance can vary, you’ll have to pay the charges come rain or shine.
Over time, fund charges can make a huge difference to your returns.
Here’s how £1,000 in a fund costing 0.1% and a fund costing 1% would perform in three different investment performance scenarios, ranging from poor (5% loss), to neutral (0% growth) to good (5% growth):
Funds with higher charges aren’t necessarily better performing; charges can reflect the management style, asset classes invested in or simply the prestige of the fund manager.
This guide explains how fund charges work and how to save money, whilst covering associated fees and taxes you might encounter.
Ongoing charge figure
A more realistic indication of the true annual cost is a measure called the ongoing charge figure (OCF).
This includes the Annual Management Charge, from which firms make their profits.
The AMC is typically made up of a number of different costs and typically ranges between 0.75% to 1.25% in most actively managed funds.
Passively managed ‘tracker’ funds tend to have lower AMCs, typically between 0.1% and 0.85%. You can read more about their advantages here.
Investment trust charges typically range between 0.8% and 1.8%.
The OCF also takes into account various additional costs such as trustee and auditor fees, that are taken directly out of the fund. These extra charges can easily amount to around 0.1% on top of the AMC.
Fund managers are legally obliged to show the ongoing charge in their fund literature and they must publish it once a year. It can be found in a document called the Key Investor Information Document (KIID).
- Find our more: read our reviews of fund supermarkets including AJ Bell, Hargreaves Lansdown and Halifax Share dealing
Fund supermarket and broker costs
If you buy a fund through a fund supermarket or broker, this will involve extra fees.
Fund supermarkets charge either a percentage annual fee, or a fixed amount each year. If you have a relatively small portfolio (up to, say, £50,000), a percentage-based charge will generally work out cheaper, while large portfolios fare better with a flat fee.
Take this example, which compares the annual charges levied by two real life fund supermarkets. One charges a fixed fee of £200, whilst the other charges a fee equivalent to 0.39% of the portfolio:
The difference in fees between the cheapest and most expensive platforms can add up to thousands of pounds for a large portfolio. Some platforms also charge a few pounds when you buy or sell an investment and some charge ‘exit fees’, although these are increasingly rare.
If you get financial advice whilst making your investment, the cost of this can in some cases be paid from your investment returns.
- Find the best fund supermarkets with our comprehensive guide
Other fund charges
Some unit trusts and OEICs, and many investment trusts, also levy additional performance fees on top of the regular annual charges – typically taking an extra 20% of everything above a certain level of performance.
Trading fees and stamp duty reserve tax
Every time the fund buys or sells a share they incur charges and potentially stamp duty.
These costs aren’t included in the ongoing charges figure.
Passively-managed tracker funds tend to have lower trading fees as they switch investments less often.
Tax on investments
Even after you’ve paid all these fund charges, you could still be hit by tax.
You can earn up to £2,000 a year from dividends without paying dividend tax; beyond this you’ll have to pay 7.5%, for basic rate taxpayers, 32.5% for higher rate or 38.1% for additional rate.
You may also have to pay capital gains tax when you sell funds. You can earn up to £12,000 from capital gains each year; beyond this you’ll need to pay 10% for basic rate taxpayers or 20% for higher or additional rate taxpayers (18% or 28% for residential property respectively).
Rather than relying on tax allowances, you can shield your fund earnings from both these charges by putting all your funds in a stocks and shares Isa.
- Find out more about stocks and shares Isas